Chris Dodd

Cuomo's Office Looking At Several Fixes For Merrill Bonuses

Zachary Roth | January 30, 2009, 2:06PM

As we told you earlier today, Bloomberg reported last night:

New York Attorney General Andrew Cuomo may demand the return of $4 billion in bonuses paid by Merrill Lynch & Co. just before it was acquired by Bank of America Corp.

But it turns out that may overstate the case a bit. A person familiar with the matter told TPMmuckraker that the investigation is considering several other possible remedies, including imposing fines and alleging violations of securities law -- as the Wall Street Journal reported yesterday.

The probe of Merill is still at an early stage. Depositions haven't yet been taken from former Merrill CEO John Thain, and Bank of America chief administrative officer J. Steele Alphin, both of whom have been subpoenaed to give investigators details on just when Bank of America learned about the bonuses, and about Merrill's massive fourth quarter losses.

If Cuomo doesn't try to get the money back, Congress might. Chris Dodd, who chairs the Senate Banking committee, declared at a press conference yesterday:

I'm going to be urging -- in fact not urging, demanding -- that the Treasury Department figures out some way to get the money back.

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Topics: Bailout, Chris Dodd, John Thain, Treasury Department, Wall Street

Barack Obama

UPDATED: Report: Cuomo May Demand Return Of Merrill Bonuses

Zachary Roth | January 30, 2009, 11:44AM

Bloomberg has a few more details about the developing investigation, conducted by New York Attorney General Andrew Cuomo, into the bonuses awarded last month by Merrill Lynch.

It reports, sourced to "a person familiar with the matter," that Cuomo may demand the return of the bonuses -- estimated at as much as $4 billion, and apparently awarded on an accelerated schedule just before the firm came under the control of Bank of America at the start of 2009.

Bloomberg adds that Cuomo is also probing what Bank of America Chief Executive Officer Ken Lewis knew about the bonuses, and about Merrill's huge losses in the fourth quarter, which appear to have ben revealed B of A around the time the bonuses were awarded.

More broadly, Bloomberg reports, the investigation is focused on "whether the companies' shareholders had all necessary information about Merrill's finances and whether federal bail-out loans to Bank of America were used properly."

John Thain, Merrill's former CEO, was ousted as a Bank of America exec shortly after news of the bonuses, and the losses, became public. According to reports, Cuomo has already subponaed Thain.

President Obama yesterday called Wall Street's awarding of billions of dollars in bonuses "outrageous." Congress is considering adding "claw back" provisions to the next round of bailout money, which would allow the Treasury to get back money it invested in banks that was then spent in ways that departed from the purpose of the government's investment.

We've got our own contact in to Cuomo's office, and will let you know what else we find out...

Late Update: Looks like Bloomberg's report may have overstated the case a bit.

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Topics: Bailout, Barack Obama, Financial Crisis, John Thain, Treasury Department, Wall Street

AIG

AIGers Who Sold Risky Deals To Get Millions In Bonuses

Zachary Roth | January 28, 2009, 11:31AM

What would you have to do not to get a bonus?

AIG, the insurance giant that was essentially nationalized in September, has confirmed to the Associated Press that it's paying bonuses to employees who sold credit default swaps -- the very deals that helped cause millions in losses, leading to the company's collapse.

According to news reports, the bonuses amount to $450 million -- or $1.13 million for each of the 400 staffers in the financial products unit.

In a statement, an AIG spokeswoman confirmed the bonuses, but not the dollar figure:

We adopted and disclosed this contractual retention program months before the government provided support to AIG. We did so because it was clear, given the market environment, that we would need to retain employees to manage the complex issues arising in our Financial Products business, which we are now unwinding.

An expert tells AP that it's possible AIG was contractually obligated to pay the bonuses. But that points up a larger problem: the TARP didn't allow the government to invalidate those agreements, as a bankruptcy judge would have been able to do. Since AIG and other firms were essentially bankrupt, there's a good argument that the same rules should apply.

Former Merrill Lynch CEO John Thain has come in for criticism (by TPMmuckraker, among others) for signing off on billions in bonuses, on an accelerated schedule, despite seeing massive losses and a government assisted takeover by Bank of America.

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Topics: AIG, Bailout, Financial Crisis, John Thain, Wall Street

John Thain

Report: Cuomo Subpoenas Thain On Bonuses

Zachary Roth | January 27, 2009, 11:11AM

CNBC's Charlie Gasparino just reported that New York Attorney General Andrew Cuomo has subpoenaed former Merrill Lynch CEO John Thain for testimony about Merrill's awarding of billions of dollars in bonuses in December.

Cuomo has been investigating the decision by Merrill to award the bonuses -- and in particular, the allegation that they were made on an accelerated schedule, before Bank of America took control of the company January 1.

Gasparino added that Bank of America chief administrative officer J. Steele Alphin, who Thain has claimed was aware of the bonuses, has also been subpoenaed.

Gasparino suggested that Cuomo could ultimately bring charges of criminal fraud against those involved in the payouts, under the Martin Act.

This looks like it could get should get interesting...

Late Update: CNBC has now posted a written story.

And here's Cuomo's statement on the subpoenas.

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Topics: Bailout, Financial Crisis, John Thain, Wall Street

John Thain

Downbound Thain

Zachary Roth | January 26, 2009, 6:32PM

The John Thain rehabilitation campaign continues.

He hasn't been on The View yet, but the chair-throwing ex-Merrill CEO did the next best thing this afternoon, talking to Maria Bartiromo of CNBC about his departure last week from Bank of America, why he's not to blame for Merrill's multiple billion dollar losses, and the whether it was a good idea to spend $1.2 million of Merill's money redecorating his office suite. (Short answer: No, but it was a "different economic environment.")

Thain said he was "surprised" by his ouster at the hands of B of A CEO Ken Lewis, saying that results from the first 20 days of the merger, which went into effect January 1, were "very good."

He blamed Merrill's losses on positions the company held before he took over in 2007, and the larger market meltdown. "Over the course of the year I was at Merrill, I was constantly sheding assets," he said, referring to toxic mortgage assets. "We were in a position of owning very illiquid things that could not be sold and had to be marked down."

And he denied that Merrill's continued buying of mortgage assets into the fall were at the heart of the massive fourth quarter losses. "Did we continue to trade? Yes. Did we put on big risk positions ...? No... The vast majority of loses in the fourth quarter were from positions that had been there since I started."

As for the claim that Thain wasn't open with B of A about Merrill's losses, Thain said:
"They were seeing exactly the same info that we saw. We gave them complete access to everything we had."

Those billion dollar bonuses Thain signed off on? "If you dont pay your best people, you will destroy your franchise. Those best people can get jobs other places, they will leave."

And about that redecoration, Thain said it was a "very different economic environment." He added: "It is clear to me in today's world that it was a mistake. I apologize for spending that money on those things."

Asked by Bartiromo why he couldn't have left the office as it was when his predecessor as CEO, Stanley O'Neal, took off, Thain replied:

"His office was very different than the general decor of Merrill's offices. It would have been very difficult for me to use it in the form that it was in.

Watch the video of that exchange:

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Topics: Bailout, John Thain, Wall Street

John Thain

You're So Thain: Ousted Ex-Merrill Chief Defends Record, Offers To Pay For Office Redecoration

Zachary Roth | January 26, 2009, 12:04PM

John Thain is fighting back.

The former Merrill Lynch CEO was ousted last week as a Bank of America exec after Merrill posted massive losses in the last quarter before its takeover by B of A. In December, Thain had approved billions of dollars in bonuses before the takeover went into effect. He also spent $1.2 million redecorating his office suite last year. (We catalogued our Top Ten Thain Moments here.)

Now CNBC has obtained a memo written by Thain to his former colleagues in which he defends his record, and offers to reimburse B of A for the redecorating spree.

Thain says that Merrill's 2008 bonuses totaled only 41 percent of 2007's, and that Bank of America was involved in the decision.

As for the fourth quarter losses, Thain calls them "very large and unfortunate" but adds that they "were incurred almost entirely on legacy positions and were due to market movements." In other words, not his fault.

That appears to run counter to the New York Times report that a substantial part of those losses came from Merrill's disastrous decision to continue buying mortgage assets into the fall, in the belief that the market had bottomed out.

Thain also says B of A knew about the losses as soon as Merrill did:

We were completely transparent with Bank of America. They learned about these losses when we did. The acting CFO of my businesses was Bank of America's former Chief Accounting Officer. They had daily access to our p&l, our positions and our marks. Our year end balance sheet target (which we more than met) was given to us by Bank of America's CFO.

Thain refers to "several topics that have been inaccurately reported in the press" but doesn't specify what the inaccuracies were.

CNBC is also reporting that in an exclusive interview, set to air at 4:15 today, Thain argued that the bonuses were necessary to retain top staffers.

The full memo follows after the jump...

Read more »

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Topics: Bailout, John Thain, Wall Street

John Thain

Merrill Approved Dividend Payment To Stockholders Last November

Zachary Roth | January 23, 2009, 5:05PM

It turns out the billions in dollars in bonuses paid out by Merrill Lynch even as its new owner, Bank of America, was lobbying for more bailout money weren't the only questionable payments the firm made late last year.

BusinessWeek reports:

On Nov. 13, just three weeks before Merrill shareholders voted to approve the merger with BofA, Merrill's former board approved the payment of 35 cent-a-share dividend to all common stockholders. The payout drained another $565 million from Merrill's coffers at a time when the firm should have been building up cash, instead of spreading it around.

Now sure, one could argue that if Merrill had slashed the dividend to the bone, the brokerage's stockholders may not have voted for the merger with BofA. But Merrill's dividend payout came just weeks after Bofa announced on Oct. 6 it was slashing its dividend in half to 32 cents-a-share--a move the bank said would save it some $1.4 billion in cash each quarter. (The bank has since cut the dividend to a penny-a-share).

The magazine also offers an important, if obvious-when-you-think-about-it corrective to the fast-emerging narrative that Bank of America knew nothing about Merrill's huge fourth quarter losses until mid December (and had no reason to know any sooner.)

Says Bizweek:

Anyone with inside knowledge of Merrill's investment portfolio could have seen that the brokerage's investments in corporate loans and commercial real estate-related securities would all take a hit in the fourth-quarter. And that includes Thain & Co., as well as Lewis' team at BofA, which was conducting its due diligence on Merrill at the time.

No one comes out of this looking good.

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Topics: Bailout, John Thain, Wall Street

Wall Street

The Thundering Herd Laid Low: A Merrill Lynch Timeline

Chris Black | January 23, 2009, 3:18PM

Key moments in the Merrill Lynch saga over the last year:

December 1, 2007 - John Thain begins his tenure as Merrill Lynch CEO, replacing Stanley O'Neal who had resigned after the company announced billion-dollar losses stemming form its mortgage investments.

September 15, 2008 - A deal is announced for Bank of America to buy Merrill, which, for the previous four quarters, has posted losses totaling $17 billion. The deal comes amid a broader financial crisis connected to the mortgage meltdown: that same day, Lehman Brothers declares the largest bankruptcy in American history, and the following day, American International Group is essentially nationalized.

October 14, 2008 - Bank of America gets $25 billion in bailout funds.

December 5, 2008 - Merrill and Bank of America shareholders vote to approve the takeover.

December 8, 2008 - Merrill's compensation committee approves payouts to staff totaling $3-4 billion, at least a month ahead of schedule. Some at B of A complain that the accelerated schedule was an effort to ensure that B of A could not cut the payments when it took over January 1.

Days later - Bank of America learns that Merrill's fourth-quarter losses were greater than expected. B of A begins lobbying the federal government for more TARP money to ease the takeover.

December 29, 2008 - Merrill bonuses paid, in the nick of time (sub. req.).

January 1, 2009 - Bank of America officially takes control of Merrill. It will later rename its brokerage division Merrill Lynch Wealth Management.

January 16, 2009 - Treasury announces it will give Bank of America another $20 billion in TARP money, to help it absorb the larger-than-expected Merrill losses.

January 16, 2009 - Bank of America reports a fourth quarter loss of $1.79 billion, including a $15.3 billion loss (sub. req.) posted by Merrill Lynch for the same quarter.

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Topics: Bailout, John Thain, Wall Street

John Thain

John Thain's Top Ten Greatest Moments

Zachary Roth | January 23, 2009, 2:55PM

If there's one corporate honcho who's emerging as the poster boy for all the varied Wall Street sins that the financial crisis has exposed -- not just greed, but callousness, obliviousness and general incompetence -- its Merrill Lynch's former CEO John Thain.

Over the last few days, the revelations about Thain's mismanagement of Merrill have been coming thick and fast -- culminating with his ouster yesterday as an executive at Bank of America, which bought Merrill at the height of the financial crisis last September.

Thain, a top John McCain backer who was tipped as a candidate for a White House post had the Arizona senator won the presidency -- has amassed quite a record in his short time at Merrill. Lavish personal spending, absentee leadership, bonuses for billions in losses -- it's almost been too much to keep track of.

So we've created a handy rundown of Thain's top 10 greatest moments over the last turbulent year. (You might also want to check out our Merrill Lynch timeline to brush up on how Thain's missteps fit in with the larger story of his firm's collapse.)

In rough chronological order, here are John Thain's top 10 greatest moments:

1. The Great Redecoration

Thain pays $1.2 million last year -- well after Merrill's huge losses on mortgage assets are known -- to refurbish his office suite. That includes $800,000 to interior designer Michael S. Smith, who's also redecorating the White House for the Obama family. (More Smith clients: Steven Spielberg, Michelle Pfieffer, and Cindy Crawford.)

Other expenses from the big redecorating project, all signed off on by Thain personally:

Area Rug: $87,784
Mahogany Pedestal Table: $25,713
19th Century Credenza: $68,179
Pendant Light Furniture: $19,751
4 Pairs of Curtains: $28,091
Pair of Guest Chairs: $87,784
George IV Chair: $18,468
6 Wall Sconces: $2,741
Parchment Waste Can: $1,405
Roman Shade Fabric: $10,967
Roman Shades: $7,315
Coffee Table: $5,852
Commode on Legs: $35,115

At this time, reports CNBC's Charlie Gasparino on The Daily Beast, Thain is "preaching the virtues of cost control, telling employees to reduce expenses including car services, entertainment and travel".

2. The Unfortunate Chair Incident

During a summer 2008 meeting with his top financial officer, Thain, angry about Merrill's huge mortgage-asset-related losses, hurls a chair against the wall, shattering a nearby glass panel.

3. Just Can't Quit Those Mortgage Assets

Even after Thain has been forced to beg Bank of America to save his desperate firm, his traders, thinking the market has "bottomed out", keep trading risky mortgage securities. Those, of course, are the very assets that had helped bring on the massive losses, mostly incurred before Thain's tenure, that made the Bank of America deal necessary.

4. The Bonus Fiasco

In October, Thain suggests he should receive a $30-$40 million bonus. By December, he compromises: $10 million. After a blizzard of public criticism, including from New York Attorney General Andrew Cuomo and Senate Majority Leader Harry Reid, he drops his request for any bonus. Later, he denies having asked for one at all.

5. The In-Retrospect-Ill-Advised Ski Trip

In mid December, Bank of America CEO Kenneth Lewis learns that Merrill's fourth quarter losses will be much larger than expected. Lewis gets the bad news not from Thain himself, but from the transition team handling the merger -- perhaps because, after the losses surface, Thain takes off for his ski house in Vail. (A "person familiar with the matter" tells the Journal, hilariously, that Thain was "working and available" while in Vail.)

6. The Failure To Impress The New Boss

Asked by Lewis about the new losses, which will officially come to $15.3 billion, Thain "didn't really have a good grasp of what was going on,", one source tells the Wall Street Journal. Ultimately, the federal government will in January give Bank of American $20 billion -- on top of the bailout funds it had already gotten -- to help it absorb the Merrill losses.

7. The Troubling Lack Of Candor

Under Thain, Merrill appears not have been as forthcoming as it might have been with its new owner about the state of its books. A Bank of America spokesman tells the Journal today: "Their fourth quarter was way beyond anything they said would happen." Even worse, Thain may also have been less than straight with Merrill itself. He doesn't fully inform his own board that, thanks to Merrill's losses, the federal government might need to step in to ensure the B of A deal goes through, according to complaints from board members.

8. The Other Bonus Fiasco

Merrill, with Thain still in charge, accelerates its yearly bonus payments, doling out an estimated $3-4 billion in bonuses before January 1, 2009, when Bank of America will take control. Some at B of A believe the expedited schedule is designed to avoid giving B of A a chance to cut those payments. New York AG Cuomo is now reportedly investigating.

9. The In-Retrospect-Ill-Advised Planned Trip to Davos

Thain plans a trip to Davos to attend the World Economic Forum next week -- even though Bank of America has discouraged the idea.

10. The Final Act

Thain pays $483,320 for 84,600 shares of Bank of America. The following day, he's fired.

Well, at least now he can make it to Davos.

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Topics: Bailout, John Thain, Treasury Department, Wall Street

AIG

Merrill Traders To Mortgage Assets: I Wish I Knew How To Quit You

Zachary Roth | January 23, 2009, 10:10AM

Yesterday we told you about how Merrill Lynch paid out billions in bonuses to staff even as its new owner, Bank of America, was begging the government for another bailout to help it digest Merrill's massive losses on mortgage assets.

And today, buried in a New York Times story about the downfall of former Merrill CEO John Thain -- whose ouster as a Bank of America exec was announced yesterday -- is an intriguing nugget that suggests just how attached Merrill was to those toxic assets.

Reports the Times:

At a news conference announcing the merger, Mr. Lewis praised Mr. Thain. Mr. Lewis said Mr. Thain's new role had not been decided, adding: "That's a credit to John. It usually does not happen that way. And it was never about him, it was always about the deal."

But after Merrill appeared to be safely in Bank of America's arms, Merrill's traders began buying risky mortgage assets, thinking that the market had bottomed out, according to two people familiar with the firm's trading. Merrill also began to run up losses on equity derivatives and other instruments, they said.

That news conference to announce the "merger" took place September 15th.

So Merrill traders resumed buying mortgage assets after the crisis in the housing market was already abundantly clear. After the government had taken over the mortgage lenders Fannie and Freddie. After Lehman Brothers had announced it was filing for bankruptcy. After the US government had effectively taken over AIG. Above all, after Merrill itself had been bought by Bank of America, with help from $25 billion of government money.

And all those developments triggered by hundreds of billions of dollars in losses thanks to investments in bad mortgage assets.

And here's the larger point: Merrill's massive fourth quarter losses, which prompted B of A to seek a second government bailout, weren't caused only by investments made before the collapse of the mortgage market, and the extent of the financial crisis, became apparent. Rather, they were in part the result of continuing to buy bad mortgage assets into the fall.

No one would trust me to invest so much as the contents of their piggy bank. But I'd like to think that, by mid-September, even I'd have known that mortgage assets might not be the best bet.

Greedy and dumb. That's a toxic combination.

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Topics: AIG, Bailout, John Thain, Wall Street

Bailout

Merrill Paid Billions In Bonuses, As New Owner Sought More Bailout Dollars

Zachary Roth | January 22, 2009, 4:40PM

It's got stiff competition, but Merrill Lynch may have just wrapped up the prize for the investment bank that best exemplifies Gordon Gekko's famed articulation of the Wall Street creed: "Greed is good."

The Financial Times reports (sub. req.) today that in early December, Merrill, which months earlier had agreed to be bought -- rescued, really -- by Bank of America, decided to pay out $3-4 billions in bonuses.

The bonuses were handed out on an accelerated schedule -- at least a month earlier than in previous years. And they were agreed to just days before Bank of America, realizing how much in toxic assets Merrill had on its books, went to the federal government asking for more taxpayer money to help it digest Merrill -- money that was eventually forthcoming.

One equity analyst told MarketWatch that the move, apparently initiated by then-Merrill CEO John Thain, was "simply outrageous and one of the more extreme examples of poor corporate governance we can think of."

You also might remember that Thain -- who today resigned as a Bank of America exec, amid criticism -- had originally asked the firm's compensation committee for a $10 million bonus for himself, as part of that round of payouts, though the committee at least had the good sense to decline the request.

And the Wall Street Journal now reports that New York Attorney General Andrew Cuomo is investigating the payouts -- part of a broader probe of executive compensation among Wall Street firms.

Just to get a clear sense of how this all went down, and what a boondoggle this looks to have been for Merrill, it's worth looking at a timeline of events:

- 9/14/08: Bank of America buys Merrill. Over the previous four quarters, Merrill had posted losses of more than $17 billion.

- 10/14/08: Bank of America gets $25 billion in bailout funds, largely in order to help it take on Merrill's losses.

- Fall 08: A proposal is made to Merrill's compensation committee that Thain receive a $10 million bonus.

- 12/05/08 - Merrill and Bank of America shareholders vote to approve the takeover.

- 12/08/08 - Merrill's compensation committee declines to approve the proposal on Thain's bonus, but nonetheless approves payouts to staff totaling $3-4 billion.

- Days later: Bank of America learns that Merrill's fourth-quarter losses were greater than expected. B of A begins lobbying the federal government for more TARP money to ease the takeover.

- 12/29/08 - Merrill pays bonuses paid, at least a month ahead of the usual schedule.

- 1/16/09 Treasury says it will give Bank of America another $20 billion in TARP money, to help it absorb the larger-than-expected Merrill losses.

- 1/16/09: Merrill reports a $15.3 billion fourth quarter loss.

The payouts are made even more shocking by the fact that, as a TPM reader pointed out this afternoon, in the current climate, staffers hardly require massive incentives to stay on -- which is usually the justification given for lavish bonuses. After all, it's not as if they're fighting off job offers from other thriving competitors.

Something Tim Geithner and co. might want to keep in mind the next time a failing bank comes begging for more taxpayer money.

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Topics: Bailout, John Thain, Treasury Department, Wall Street